Inventory Costing Methods: Weighted Average, FIFO, LIFO & Estimation Techniques

What is the weighted average method in inventory costing?

When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.

What are the four inventory costing methods mentioned?

Specific identification, FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average.

What is the effect of using the weighted average method on financial statements?

It smooths out price changes, making cost of goods sold approximate current costs and ending inventory reflect current costs.

What does FIFO stand for in inventory costing?

First-In, First-Out.

What does LIFO stand for in inventory costing?

Last-In, First-Out.

Why might inventory estimation methods be necessary?

They are used for interim statements or when physical counts are impossible due to events like fire or flood.

What are the two methods mentioned for estimating inventory?

Retail Inventory Method and Gross Profit Method.

What is the primary learning objective related to inventory costing methods?

To compute inventory in both periodic and perpetual systems using various methods.

How do inventory methods affect cost amounts assigned?

Different costing methods assign different cost amounts due to changing prices.

What is the impact of the weighted average method on ending inventory?

Ending inventory approximates current costs.

What is the significance of the financial statement effects of costing methods?

They highlight how different methods can lead to variations in reported costs and inventory values.

What is the purpose of the financial statement effects of inventory costing methods?

To show how inventory costing methods can impact the income statement and balance sheet.

What is the relationship between cost of goods sold and current costs in the weighted average method?

Cost of goods sold approximates its current costs.

What does the term 'periodic system' refer to in inventory costing?

A system where inventory is updated at specific intervals rather than continuously.

What does the term 'perpetual system' refer to in inventory costing?

A system where inventory is updated continuously as transactions occur.

What is the role of the retail inventory method?

To estimate inventory based on the relationship between the cost of goods available for sale and the retail value.

What is the role of the gross profit method?

To estimate inventory by applying a historical gross profit percentage to sales.